Is a Recession Likely During President Donald Trump's Term? Insights from Over a Century of Economic History.
Unleashing the Ominous Scepter: Will Trump's Second Term Usher in a Recession?
America's economic engine has been purring along for a good 16 years, with Warren Buffet's beloved Berkshire Hathaway not finding a single reason to bet against Old Glory. However, the looming question remains: Will President Trump's second term set the stage for the next U.S. recession?
The annals of history don't necessarily repeat themselves on Wall Street, but they do share some striking similarities. Since 1913, the stars seem to align in peculiar ways when it comes to economic downturns and the political party in power.
Over the last 112 years, we've seen an interesting pattern emerge. Throughout this period, nine Democrats and ten Republicans have graced the Oval Office. Interestingly, three out of four Democratic presidents avoided a recession that took root during their reign. On the flip side, every single Republican president, including the mighty Donald Trump during his first term, witnessed a recession begin under their watch.
It's crucial to remember that this doesn't imply that Republican policies are the root of economic woes. The reality is, economic downturns are a key part of the economic cycle, and they're as inevitable as the changing of the seasons.
The U.S. economy is more stable than a sloth after a big meal, thanks to consistent growth for nearly 16 years. ** US GDP data by YCharts**. GDP = gross domestic product.
However, there's reason to be concerned about Trump's trade policies and their potential to tip this economic juggernaut into a recession.
On April 2nd, our president unveiled a 10% global tariff, accompanied by higher "reciprocal tariff rates" specifically targeting countries with unfavorable trade imbalances with the U.S. Ever the maverick, Trump has tweaked his tariff and trade policies over the last two months. Earlier this week, a federal court vetoed Trump's sweeping tariffs on imports, setting the stage for a Supreme Court showdown.
If these tariffs stay around, there's a risk they'll sour trade relations with our trusted partners, breed negative sentiment towards American goods, and potentially fan the flames of inflation in the U.S.
Moreover, the first quarter's initial Gross Domestic Product (GDP) reading showed a contraction of 0.3% on an annual basis. Two successive quarters of economic contraction is a common definition of a U.S. recession.
Based on an 112-year history of correlations, as well as tangible first-quarter U.S. GDP data, there seems to be increased odds of a recession unfolding under President Trump. Although the U.S. economy and stock market are like estranged siblings without a blood bond, a shrinking economy can weigh heavily on corporate earnings and dampen the spirits of the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite.
But it's not all doom and gloom. Economic and market cycles aren't parallel lines that intersect at a single point.
While the more than century-old correlations suggest a recession ensuing during Trump's presidency, the statistical data doesn't support the notion of an imminent economic downturn.
Although the first-quarter GDP reading showed the economy contracting, the Federal Reserve Bank of Atlanta's GDPNow forecasting model, which has been relatively accurate since its inception in August 2011, is projecting a 2.2% annualized GDP growth rate for the June-ended quarter. This contraction in the first quarter could just be a fleeting blip on the economic radar.
More importantly, economic and stock market cycles don't hopscotch across each other. And the nonlinearity between these cycles is a fantastic thing for working Americans and investors.
Since the end of World War II, the typical U.S. recession has lasted a mere 10 months, with no recession lasting more than 18 months. On the contrary, the average period of economic expansion has endured for approximately five years, with some periods of growth surpassing the decade mark. So, even though a recession may rear its ugly head, it's usually a short-lived affair.
The Stock Market: A Golden Goose Covered in Mud
It's tempting to focus on the specter of a recession, but the dissimilarities between periods of growth and downturns are stark. Since the end of World War II, the standard U.S. recession has lasted around 9.5 months, whereas the average period of economic expansion has clocked in at around five years.
This contrast is rather similar when examining the stock market and how the Dow Jones, S&P 500, and Nasdaq Composite respond over the long haul.
In the twilight of June 2023, as the broad-based S&P 500 was confirmed to be amidst a new bull market, researchers at Bespoke Investment Group published a data set on social media platform X (previously known as Twitter) that illuminated the stark differences in length between S&P 500 bull and bear markets.
In one corner, the average S&P 500 bear market lasted a mere 286 days (roughly 9.5 months) since the inception of the Great Depression, with the longest bear market enduring for 630 days. On the other end of the spectrum, the typical bull market has persisted for 1,011 days, with 14 out of 27 bull markets (including the current bull market) lasting longer than the longest bear market.
While it's easy to wallow in fear and be swallowed up by the "what-ifs" on Wall Street, historical data conclusively shows that time is a powerful ally. Even if the U.S. economy and stock market tangle with a rough patch during Trump's second term, there's little reason to believe equities won't soar to new heights in the years to come.
- Investors might be careful with their finance decisions when considering the potential impact of Trump's second term on business and the economy, given the historical pattern that suggests Republican presidents have frequently overseen recessions.
- The looming trade policies of President Trump, such as the proposed 10% global tariff, could have significant effects on the finance sector, potentially leading to negative sentiment towards American goods, inflation, and strained relations with trading partners.
- While the first-quarter GDP reading indicated a contraction, the Federal Reserve Bank of Atlanta's forecasting model projects a potential growth rate of 2.2% for the following quarter. This suggests that a recession, while possible, might only be a temporary setback in the larger context of economic cycles, which historically last around five years on average.
